Air Lease Corp (AL) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2012 Air Lease Corporation earnings conference call. My name is Allison, and I will be your operator today.

At this time all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions).

As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Mr. Ryan McKenna, head of strategic planning and investor relations. Please proceed, sir.

Thank you very much. Good afternoon everyone and welcome to Air Lease Corporation's fourth-quarter 2012 earnings call. This is Ryan McKenna, Vice President of Strategic Planning and Investor Relations. I am joined this afternoon by Steve Hazy, our Chairman and Chief Executive Officer; John Plueger, our President and chief operating officer; and Greg Willis, our Senior Vice President and Chief Financial Officer.

Earlier today we published our fourth-quarter results for fiscal year 2012. A copy of our earnings release is available on the investor section of our website at www.AirLeaseCorp.com.

This conference call is being webcast and recorded today, Thursday, February 28, 2013, and the webcast will be available for replay on our website. At this time all participants to this call are in listen-only mode. At the conclusion of today's conference call, instructions will be given for the question-and-answer session.

Before we begin, please note that certain statements in this conference call, including certain answers to your questions, are forward-looking statements within the meaning of Private Securities Litigation Reform Act including, without limitation, statements regarding our future operations and performance, revenues, operating expenses, other income and expense, and stock-based compensation expense.

The statements and any projections as to the Company's future performance represent management's estimates of future results and speak only as of today, February 28, 2013. These estimates involve risks and uncertainties that could cause actual results to differ materially from expectations. Please refer to our filings with the Securities and Exchange Commission for a more detailed description of the risk factors that may affect our results.

Air Lease Corporation assumes no obligation to update any forward-looking statements or information in light of new information or future events. In addition, certain financial measures we will use during this call, such as adjusted EBITDA and adjusted net income, are non-GAAP measures and have been adjusted to exclude charges relating to amortization of discounts and debt issuance costs and stock-based compensation expense, among other charges.

A description of our reasons for utilizing these non-GAAP measures, as well as our definition of them and the reconciliation to corresponding GAAP measures, can be found in the earnings release that we issued today. This release can be found in both the investors and press section of our website at www.AirLeaseCorp.com.

Unauthorized recording of this conference call is not permitted. I would now like to turn the call over to our Chairman and Chief Executive Officer Steve Hazy.

Thanks, Ryan. Ladies and gentlemen, good afternoon and thank you for joining the ALC call today.

I am very pleased to report that Air Lease increased its EPS by 58% in the fourth quarter of 2012 over 2011's fourth-quarter results. We recorded a 117% increase for the full year 2012 EPS versus 2011 EPS, continuing the execution of our strong growth plan. I think these numbers validate the excellent performance of the Company in 2012.

We built a fleet of the highest quality assets with excellent airline customers and have positioned the Company's for future [growth levels]. These factors have distinguished us from our publicly traded peers. Owing to the strong financial and operating results of ALC, which exceeded our expectations, our Board of Directors has authorized the Company's first quarterly cash dividend, authorized common stock as part of a new cash dividend policy.

This modest dividend of $0.025 per share is an important step in the evolution of our Company, and one that will allow for us to continue our strong growth. We believe that this action will enhance shareholder returns and broaden our investor base to include those funds, retail investors and institutional investors that focus primarily on dividend-paying stock. A wider shareholder base and a stable yet growing equity price are good for all of the stakeholders in ALC's capital structure.

Based on our assessment of growing demand, we have now reached agreement with The Boeing Company for the additional purchase of 10 new Boeing 777-300ERs, nine of which we'll deliver in 2014, and the tenth aircraft in the first quarter of 2016. In February this year we also concluded a milestone purchase agreement with Airbus for 25 firm, plus five option Airbus A350-900s and 1000 aircraft.

In addition to our existing order for five 777-300ERs and our existing fleet of seven 777s, the new order for the ten 777-300ERs will bring our 777 portfolio up to 22 aircraft. And with these airplane additions, we will be able to offer our customers high-quality options when selecting lease content for their twin-aisle fleets of tomorrow.

On the narrow-body side, during the fourth quarter we exercised the remaining 14 A321 neo options that were available to us from our purchase agreement with Airbus, which was announced at the Le Bourget Air Show in 2011. We announced also our launch order for 75, plus 25 re-confirmable, 737 MAX aircraft at the Farnborough Airshow last summer and had just recently confirmed five of those option aircraft. These reconfirmations make ALC Boeing's largest leasing customer for the new family of the Boeing 737 MAX.

With this order activity concluded we now control a very substantial order book of the most highly sought after types. This pipeline allows us to strategically control our customer regional concentrations by signing agreements with airlines many years into the future. We believe that our clearly defined growth strategy allows both debt and equity investors excellent and positive revenue visibility many years into the future when developing their forecasts and estimates, and we foresee no need to raise incremental equity to fund all of these deliveries in our growth plan.

Now turning our attention to the state of the industry as a whole, while the global economy faced broad-based challenges and headwinds in 2012, the airline industry proved resilient. Despite negative predictions at the beginning of 2012, passenger traffic in the airline industry both grew globally, and even in Europe grew a healthy 5.3% for the full year according to the International Air Transport Association.

We believe the growth of passenger traffic that occurred in 2012 despite these headwinds is further indication and demonstration that the current generation jets will likely not be retired early, as airlines need all of this lift to support sustained, long-term demand in passenger air travel.

Consolidation continues amongst airlines, most notably the merger of American Airlines and US Air which was recently announced. We think that this trend will continue on a global scale and as a productive step, as airlines seek to further rationalize and consolidate their cost structures and improve industrywide profitability and cost level economics.

We remain optimistic about our growth opportunities at Air Lease and the increased demand for leased aircraft. Now John Plueger, our President and Chief Operating Officer, will expand upon ALC's results and strategic positioning. John?

Okay, thanks, Steve. As we have stated on prior calls we choose to place our new aircraft with ample leadtime, locking in attractive lease rates on long-term contracts. Then we are able to pursue opportunistic transactions that will further enhance our results.

So during Q4 we executed this strategy and took delivery of 11 aircraft from our new order pipeline and acquired three incremental planes, finishing the quarter with 155 aircraft across a diverse and balanced operator base of 69 airlines spread over 40 countries. Our average fleet age remains very low at 3.5 years at the end of Q4, with a very healthy average 6.8 years remaining on our leases.

In 2013 our Q1 deliveries will be modest. And for the remaining three quarters of the year, we expect our pipeline will deliver more evenly than it did in 2012.

During the fourth quarter, we profitably sold the first aircraft out of our fleet, an A320, with a gain included in other income. We also navigated the insolvency of one of our customers, XL Germany, who is operating one 737 800 from our fleet. And working with their management proactively, we were able to remove our aircraft and plays with another airline profitably prior to their insolvency filing. We had multiple customers lined up for the aircraft at satisfactory lease rates.

Our business model of acquiring aircraft types that are highly in demand, and holding cash security deposits and maintenance reserves, proves itself in these situations. Outside of XL Germany, our lessees continue to perform well and we have no significant concerns.

During the fourth quarter ALC observed generally stable lease demand for our new Advanced Technology aircraft, with increasing demand for wide-body aircraft as Q4 progressed. A320 lease rates are firming, but still below where they need to be. To date we are emerging from the winter season in the Northern Hemisphere without major headline-grabbing bankruptcies that have occurred in past years.

Load factors have held up, with capacity being better controlled and managed than historically. Our financing rates continue to improve and lease rates are in-line with our expectation, which have resulted in ALC's profitability continuing to exceed our internal plan. Our long-term leases generate stable, multiyear cash flows which allows for consistent profit generation through the cycles.

Our success in securing forward lease placements of new aircraft has continued, and we have responded by increasing our order book, as Steve has discussed earlier. Further, we have worked with the manufacturers to accelerate certain delivery positions to meet the needs of our customers. When compared with our pipeline at the end of Q3, we have added two additional aircraft for delivery in 2013 for a total of 34 planes, which are 100% placed.

In 2014 we now have seven additional aircraft delivering for a total of 34 planes, of which we are 91.2% placed. And in 2015 we have added five incremental aircraft for a total of 31 deliveries that are 48.4% placed.

Now let me make two points here. First, as we order more aircraft to enhance our growth in the 2014 timeframe and beyond, the percentage placement for each year will fluctuate downward until these new positions are placed. Second, although we have spoken about our wide-body orders that we placed in the first quarter of 2013, our overall fleet mix target will remain at about 70% to 75% narrow-body and 25% to 30% wide-body.

With that, let me now turn the financial review over to our CFO Greg Willis, who will walk you through the financial results in more detail. Greg?

Thank you, John. During the fourth quarter our revenues grew by more than 50% to $190 million, and our revenue nearly doubled from the prior year to $656 million, with our pretax margin increasing to 31.1% for the year. This translated into EPS more than doubling over the prior year.

We accomplished this by deploying over $2 billion in capital during the year and growing our fleet by a net 53 aircraft. During the year and we executed numerous capital market and bank transactions that have allowed us to raise over $3 billion in the debt capital -- in debt capital, and constructed a debt portfolio with a low composite cost of funds of 3.94% while being 60% unsecured.

This strategy provides our management team with operational flexibility that translates into a competitive advantage for ALC in the marketplace. At the end of January, we launched our first debt capital markets transaction of 2013, raising an additional $400 million in unsecured debt. Investors have distinguished ALC from our peers based on the high-quality aircraft in our fleet, and our clearly-defined growth strategy which allowed us to price the seven-year note at 4.75%.

A key aspect of our financing strategy is that we look to opportunistically task the market to maintain a higher level of liquidity while minimizing interest expense. This provides us with the financial strength to optimize the funding of our book and to capitalize on attractive aircraft opportunities that are presented to us. While we do not have a large number of deliveries in the first quarter of 2013, we believe that it was the best decision from a corporate finance perspective to secure long-term, unsecured financing at such low rates.

We continue to execute on our plan to modestly increase our debt to equity ratio, but not to exceed 2.5 to 1, and our SG&A will continue to decrease as a percentage of total revenue.

This concludes my review of the financial performance of the Company, and I will now turn it back to Ryan. Thank you.

That concludes management's remarks. For the question and answer session, each participant will be allowed one question and one follow-up. I would like to hand the call over to the operator for those questions.

(Operator Instructions).

We would also ask that you identify your name and the firm that you are with.

John Godyn, Morgan Stanley.

It is John Godyn at Morgan Stanley. Thank you for taking my question here. Steven and John, I just first want to ask about the dividend policy. I think it is an interesting move. If you could just help us think about how you think about capital allocation on a go-forward basis, and the dividend policy versus buyback. Did buyback come up in the thought process? I am sure they did (multiple speakers).

Yes, we carefully evaluated the most optimal capital strategy going forward. We have a pretty aggressive and strong capital expenditure plan that encompasses now 325 new aircraft over the next 10 years. In light of that, we wanted to minimize the amount of liquidity that we would utilize for this purpose.

So a shareholder buyback does not really work for us, because we believe we can perform much better by deploying the capital we have and reinvesting earnings and growing our business. And I think that is the best way to reward our shareholders.

The rationale for the dividend arose from the fact that a lot of our institutional investors, and a significant amount of retail demand, is based on companies that pay a dividend. We have a lot of investors that have buckets within their investment portfolios that are allocated to dividend-paying stocks.

So we felt the best way to address that without hurting the cash flow of the Company going forward is to have a small, modest dividend, but focus on growing our earnings and growing our share value, and this initial stock represents less than 5% of our earnings. So $10 million in 2013 versus we earned $200 million plus in pretax income in 2012.

So you can see it is a very small payout ratio, but what it does is increases the catchment area for investors to come into Air Lease. And I think that is good for all shareholders.

That is very helpful color. Thank you. And just as you think about the size of the dividend, as you mentioned it is a bit small versus net income. Is this something that we should see you grow over time, and do you have any sense, can you put any boundaries on where it could go? Thank you.

Yes, this is John. Look, this is up to our Board of Directors. We are not making a forecast of future dividends or increases or anything else like that. But in line with Steve's comments, the purpose here is really to provide a small incremental return to shareholders, but mostly to expand our shareholder base.

So, as we move forward, we don't really offer any forward guidance on future dividends or increases, but suffice it to say that dividends at this level on a regular basis are probably fair game for the future. And as we go into the future, further on, or a year or so from now, we may slightly increase that. But it is going to be primarily up to our Board's decision.

That is very helpful. Thanks, guys.

Yes, we wanted to start on a modest level. And that gives us the capacity, as the Company continues to outperform on the earnings side and developing our overall asset base, it gives us that window to increase dividends in the future, so long as the Company is performing at or beyond our expectations and plans.

Thank you.

Mike Linenberg, Deutsche Bank.

Mike, are you there?

Arren Cyganovich.

I just wanted to make a clarification on the -- I believe you said you didn't believe that you're going to have to make any equity issuance for the -- I think it is now $23.4 billion of committed aircraft purchases. I want to understand how you get there over time. I know -- I understand the equity will increase. Should we expect an increased amount of aircraft portfolio sales to help reach that growth?

That is correct. And also, let me point out that -- and Greg will correct me if I'm wrong here -- sitting here today, if you take all of our firm lease agreements that we have both on the aircraft that are in our fleet and the aircraft that we have signed forward lease commitments on, we have got now approximately $11.4 billion of firmly contracted cash flows. So we take that into account going forward in matching our debt maturities with our capital expenditures and the five-year plan that our Board has most recently viewed out. Greg, do you want to further comment?

Yes, I would like to point out that that $23 billion is over a ten-year period. So you really have to factor in the cash flows that the aircraft will generate themselves, which will then be reinvested into the Company to help make those commitments.

Yes, we did an extension of our forecasts out to 10 years to make sure that we stayed well within the boundaries of our 2 to 2.5 leverage ratio on the outside. And we accomplish that by reinvesting at least 90% of our retained earnings back into the Company.

Also, we do not have a tax liability at this time, because we reinvest in new aircraft. So we essentially defer any income tax that is due. So all that funding is available to invest in new aircraft.

So we carefully crafted this long-term investment strategy, keeping in mind the goal that we don't want to raise any more equity to dilute our existing shareholders. We want to build existing shareholders -- reward them with a value appreciation resulting from our growing profitability.

Okay, that is helpful. Then just as a quick follow-up, do you have the amount of the gain that you had on the A320 sale?

(multiple speakers) That is lumped into other income. There was actually another -- a spare engine that we sold that we had some other management fees. Greg can give you the exact amount for these other income items for 2012. Greg, do you have that information handy?

Yes, we recorded a total of $10 million of other income and we haven't broken out the individual gains.

We don't break out the (multiple speakers)

That includes the disposition of the A320 and so we look forward to additional aircraft sales in the future. Obviously, right now our focus is on building our portfolio, building our revenue base, building our fleet. But as the Company continues to grow, the sale of used aircraft will become an important component of generating additional earnings as well as cash flow that we can reinvest in the business.

Thank you very much.

Mike Linenberg, Deutsche Bank.

Apologies for earlier. This is Richa Talwar asking some questions on Mike's behalf. First, I wanted to hear your views regarding future growth opportunities, particularly in the sale-leaseback market.

Some of your competitors recently expressed optimism about upcoming opportunities, considering the record orders placed in 2010 and 2011 and those that they start to deliver this year. And I wanted to hear how large of an opportunity you think that is to add business outside of your current order book and by way of sale-leasebacks. Thanks.

Thanks. Just a comment, this is John. The sale-leaseback is not our business model. And we don't look to that business segment for any meaningful growth in our future.

We have purchased opportunistic transactions. We have done sale-leasebacks and we continue -- we will find them here and there as we talk to our different airline customers. But I would say for Air Lease, it is not a main factor in our profitability plan going forward.

It is very difficult to achieve the type where profit margin that we have at Air Lease and the operating lease business to the sale-leaseback model. It is very difficult to sustain a 30%-plus profit margin.

Because it is such a competitive funding landscape, for the large sophisticated airlines usually bid these out. It is an auction process, and it is strictly based on pricing. And so we are not going to get involved in a race to the bottom. There is plenty of other lessors that can participate in that spectrum of the market.

It is a growth market. There is a significant amount of financing that has to be done through [daily] specs. But Air Lease is not focused on that business. That is not our strength. And that is not where we can maximize shareholder value.

All right, thanks. That was helpful color. And then my second question is on opportunities you are seeing in the more mature market. You commented on the potential US Airways/American merger and I was thinking about the need for fleet replacement across the industry. What are your views on current opportunities in more mature markets specifically?

Generally, when there is consolidation we work very closely with the airlines that are coming together in the new marriage. And we work with them on their fleet planning alternatives. And usually it involves rationalizing the fleet, reducing the number of fleet types, disposing of obsolete aircraft or airplane types that don't fit into the new strategy of the combined carrier.

And so there will be opportunities for Air Lease to provide our aircraft from our order book to these new consolidated carriers on a very efficient basis. And those are opportunities that we will pursue both domestically and with international carriers.

All right, thank you.

David Fintzen, Barclays.

It is Dave Fintzen from Barclays. Curious, you guys have mentioned -- you talked a lot about being the opportunistic. I am curious how you are thinking about the last of the run classics on the 7-3 and the A320 side, particularly given some of the headlines on maybe the Delta or Ryanair looking opportunistically. Is that an opportunity or is there too much residual risk that you don't really want to get too aggressive in there?

No, I think it is an opportunity. Throughout our management careers we have actually benefited from purchasing aircraft at reasonably -- pretty healthy discounts as we get to the end of their production life. And we have done well with those aircraft.

So to the extent that we believe that pricing is attractive enough to overcome any residual values concerns, historically as a management team we have acted upon it. And as you have heard in our remarks earlier, we have accelerated positions forward, and that creates for us -- when we accelerate a position forward that creates basically another hole that we can fill in later, should Airbus or Boeing have any more availability to give to us in that slot.

So I think we are not afraid of it. We actually have exploited it in the past successfully. And if we see those opportunities, we will continue to do so.

But we are very mindful of the average age of our fleet, and we don't want to do anything that would in a significant way dilute the youth of our fleet and the competitive position of our portfolio. So our primary focus, for all of you listening in, is the new aircraft. That is where we are as the most competitive.

We are at the leading edge. We work with the major airlines of the world in their fleet planning. We're there holding hands with them, and that is really our strength.

From time to time we will look at some older planes for trade-ins against newer planes, but that is a supplementary part of our business. It is not our mainline business.

Okay, okay, that is very helpful. I appreciate that. Just a little follow-up on the 320 sale. You mention selling aircraft will become a part of the model. Is that the way to think about this? Or was there something specific that you saw in this transaction that made it more of a one-off?

No, I think it is part of our ongoing strategy that we will be disposing of aircraft to balance and rebalance our portfolio. And if we can make a gain on the sale that is greater than the net present value of the earnings of a future lease stream, we are going to exercise that option and sell the aircraft, generate liquidity that we can reinvest in new aircraft. And that is, we believe, the best route to maximizing shareholder value.

David, let me just remind -- we have often told investors and shareholders and that you really have to do two things to keep your fleet young. One, it is you got to keep buying new airplanes, and, two, you got to sell the airplanes as they get a little bit older. So that is very much a core of our business model.

Okay, great. I appreciate that color. Thanks, guys.

Scott Valentin, FBR.

Just a quick question. In terms of the plane you took back from XL, has that been released at a comparable rate? Or have you disclosed what -- I assumed it is a similar rate, but --?

(multiple speakers) It has been leased at a longer lease than the one we had originally. It is a longer term with this particular lessee and the rates are at market levels, which are very good for 737-800s.

Okay, okay. And then maybe a bigger picture question. The banks have been entering the space and just wondering if you have any concern, given they have a cost of capital advantage over some of the independent lessors, if there is any risk there that they drive down pricing in an effort to gain market share.

None of the other lessors have the pipeline of new aircraft that we have. We believe that our relationships with the airlines and the decision-makers with those airlines is second to none. We are not really seeing a lot of competition in most of the segments of our activities.

I will give you an example. We just signed a 12-year lease on two brand-new 777-300ERs with Air New Zealand, which will replace their last two Boeing 747s. We had no competition from any lessor. We were the only game in town, and it is as a result of our close relationship with the airline and the fact that we had the right airplane at the right time under the right terms.

Okay, thank you very much.

Glenn Engel, Bank of America.

A couple of questions please. One, in your rentals, was there any maintenance revenue in there? You mentioned the OFC thing. Or is that just strictly base rentals?

This is Greg. We disclosed in our K there is $25 million of maintenance revenue in the rental number.

That is for the full year? How much was in the fourth quarter?

For the full year. The math for the quarter is [$8.25 million].

That is net overall revenue. Please understand that is not the gross overall revenues we received. That is actually a relatively small percentage of the cash overhaul reserves that we received.

We only booked a portion that based on a very, very careful analysis and testing is the part that is not returnable or refundable or claimable by the airline. Does that make sense?

Yes, but I guess I was wondering, so this has nothing to do with the plane coming back early, getting --?

No.

No.

It is just a normal booking --?

The normal revenue pattern.

Okay. The maturity of your debt, where are we right now in terms of average maturity?

I think it is between four and five years.

And your goal is still to get it up closer to the same as the lease rates?

[It's up to 7]. With regards to the seven-year note that we did, helped a significant amount.

We are also looking at an Ex-Im Bank bond, which has a 12-year final tail on it. And that will further continue to improve our overall debt maturity profile.

And, finally, do you have many aircraft coming off lease next year?

No.

No.

Very few; very small percentage, and most of our leases are getting extended.

Thank you very much.

That partly is due to the fact that we have a young fleet, so these are still desirable airplanes. The vast majority of our lease terminations result in an extension.

Yes, historically, let me just make the comment with our management team, that operating on our new fleet basis historically over many years, generally speaking, about 75% of our first-run leases extend.

Thank you.

Mark Streeter, JPMorgan.

It is Mark with Jamie here. Steve, and John, I want to tie in some of your comments on the 777s with what is going on with the 787's and your discussion about fleet planning and the pullback in export credit. I am just trying to tie these together.

Are they related? Is your bigger bet on narrow-bodies related to maybe what is going on with the 787s or your customers' fear over the availability of export credit? How does this -- are these tied together? I wonder if you can comment.

Certainly, we commented that the wide-body demand we saw increasing towards the end of the second quarter, and it continues now, I think certainly one could say that some of that is probably attributable to concerns about the 787 resolution. But, also, part of it is just based upon replacement and pure demand.

And on the single-aisle side, and again, we are not changing our overall strategy mix. It is still going to be about 70%, 75% single-aisle. We do see an overall continuing increase in the overall lease percentage of the fleet. It is currently just a hair under 40%, certainly more than a third.

Over the next 2 to 3 years we do see that growing to about 44%, 45%. And I think part of the factor that there may in fact be that the export credit financing has gotten a bit more expensive with the 2010 ASU. And so we have already seen some evidence of that over the last few quarters.

I think we can point to a couple of examples that airlines have tipped the scales in favor of leasing as opposed to paying slightly higher rates that are involved with export credit financing.

Okay, great. And then just one more from us. Your 2017 bonds, the $1 billion deal, you're coming up on the one-year anniversary of placing those. You have a 50 basis point step up. If you don't get a rating, you are clearly a better credit than some of your rated peers, at least in my opinion. Where do you stand right now with the rating agencies?

It is still an ongoing process. I think the truth is we just now turned [three years today]. That is about the absolute minimum that we are hearing back as a platform for serious investment-grade ratings.

But our dialogue is continuing and, certainly, our year-end results, our 10-K results here, et cetera, is an important metric that we are -- have provided now to the agency. So the dialogue continues, but as before we just simply cannot predict when this may happen. We think our credit metrics and profiles continue to get stronger every quarter and every day, and we think we are -- easily demonstrate that.

But I just always shy on making predictions as to when this might happen. I would just say that, rest assured, it is a top priority of his management team to get us there.

Great, thank you.

Howard Goldberg, Credit Agricole.

Could you provide a range for war you see your acquisition of flight equipment coming in, the spending for 2013?

(multiple speakers) We have 34 aircraft on order that have all been placed for calendar 2013.

If you refer to the 10-K we have got a commitment table in there that lists exactly how much capital is going to be expanded. So that is in the filing.

Okay, based on the 34 aircraft?

Correct.

Correct.

Okay, haven't had a chance to go through it. But we will do so later. Thank you.

I would now like to turn the call over to Ryan McKenna for closing remarks.

Thank you very much for all dialing in. And we will speak with you next quarter.

Thank you for joining today's conference. This concludes the presentation. You may now disconnect. Good day.